The Human-Capital Costs of the Crisis

Unlike a hurricane or earthquake, the coronavirus pandemic has caused no damage to physical capital stock. But firm-specific skills have no value when the firm that uses them goes out of business, which is one reason why US productivity, wages, and economic growth are likely to be affected for years to come.

BERKELEY – US President Donald Trump tells us that once COVID-19 is contained and it is safe to go back to work, the economy will be “great again.” Is he right?

There is at least one reason to think he is. After all, unlike a hurricane or earthquake, the pandemic has caused no damage to the physical capital stock. It follows, Trump and his advisers argue, that we can pick up where we left off. The economy took a time-out, but now output will rebound swiftly to pre-crisis levels and growth will proceed as before.

We are even told that the economy will be stronger than ever. People who put off buying a car because it was unsafe to visit the dealership will do so now. Firms that have put expansion plans on hold will double down on investment. Baseball teams unable to play in the spring will schedule double-headers in the fall.

Unfortunately, reality will not oblige Trump’s rosy scenario. Households newly aware that they lack the financial reserves to deal with unforeseen circumstances will increase their precautionary saving and continue to put off buying that new car. Firms won’t invest in expanding capacity until they are confident that the virus won’t return. With the developing world entering and exiting the crisis later than the United States, exports will be weak.

The good news is that public spending can replace the private spending that is lost. With interest rates at rock-bottom levels, the US still has fiscal space, despite its staggeringly large deficit. It’s important to recognize that fiscal stimulus will be needed for an extended period, given that higher precautionary saving and weak investment will persist. The temptation to turn off the fiscal tap too early, as the US (and Europe) did in 2010, must be resisted.

But the supply-side damage from the crisis is not so easily repaired. Inevitably, supply chains will have to be restructured in ways that make production costlier. Even if they have to pay more, firms will produce closer to home, whether because of their heightened recognition of the risks of relying on far-flung operations, or in response to political arguments for achieving national self-sufficiency in the provision of essential goods. For firms, enhanced security and certainty will mean higher costs and lower productivity, which will translate into higher prices for consumers.

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But this is a small problem compared to the impact on labor. Workers experiencing unemployment in a downturn can be permanently scarred. They are less able to form durable attachments with employers and more likely to experience additional episodes of joblessness. Their wages tend to be lower, not just in the immediate aftermath of the event, but for decades, even over their entire working lifetimes. Lower wages are a sign that these workers’ productivity has been impaired.

In other words, while there has been no destruction of physical capital in the pandemic, the risk of damage to human capital is significant. At a time when unemployment in the US is on course to reach 25% and higher, this is a serious concern.

Historical evidence of the negative effects of unemployment on human capital is extensive. My Berkeley colleague Jesse Rothstein has documented their prevalence following the Great Recession. My teacher Nick Crafts, now at the University of Warwick, analyzed their ubiquity during the Great Depression.

In part, these effects reflect the frictions that arise when a worker’s attachment to a firm is broken. Firm-specific skills have no value when the firm that uses them goes out of business. Even when a worker’s skill set is more widely applicable, finding a suitable match with another employer may take time. This suggests that the US is more at risk of squandering human capital than European countries, where governments are pursuing ambitious policies to preserve employer-employee relationships.

Unemployment and hardship can also lead to demoralization, depression, and other psychological traumas, lowering affected individuals’ productivity and attractiveness to employers. We saw this in the 1930s, not just in declining rates of labor force participation but also in rising rates of suicide and falling rates of marriage. Here, too, one worries especially about the US, given its relatively limited safety net, its opioid crisis, and its “deaths of despair.”

Many of these negative consequences are most prevalent when unemployment is recurrent or extended. If this downturn turns out to be as short as it is sharp, one can hope that the loss of human capital, the resulting damage to the economy’s productive capacity, and the pain and suffering that come with them will be limited.

The length of the downturn will depend above all on our success at containing the coronavirus and mitigating its effects. And that success will hinge, in turn, on our cohesiveness as a society and on the quality of our leadership. For Americans, that is not a very hopeful note to end on.

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Besides any of the real, but really only short-term superficial impacts to economic systems, and especially labor, there is a more critical consequence. Presently, the University College London is most definitely diving in to the real consequence and the global impact of the present process that is an effect of the reactive diverse responses to one virus, that is presented as a pandemic publicly.

Here is a link that includes reference to Dr. Michael Veal and the DP-3T tracing system for review:https://www.ucl.ac.uk/news/2020/apr/covid-19-scientists-develop-bluetooth-tracing-system-privacy-heart

The issues of Bluetooth contact tracing are the issues of the "heart" of any local, with global interface 5G systems that are being developed at this time. The issues of personal privacy is the "heart" of the old structural institutions of government systems that allowed individual privacy, delivery of services within communities, and revenue flows to state processes to allow existence within communities that could develop roads, water systems, sewer systems, schools within a variety of types of commercial enterprises.

In the United States, the Census was the sourcing process of all basic data on citizens, the United States Post Office was the output of that data, any changes of addresses was the "tracking" data of citizens, the IRS was the interim data accumulator for correlating to the Treasury, Labor, and Commerce control centers. I am using simplistic data points, and labelling those data points with key words to distinguish the data "piles". There was, and is much crossing of the paths and layers of the piles in the sorts of the data of citizens. In the United States, per Federal law, PPI was and SUPPOSEDLY still is regulated.

"32 CFR 701.115 - Protected personal information (PPI). (a)Access/disclosure. Access to and disclosure of PPI such as SSN, date of birth, home address, home telephone number, etc., must be strictly limited to individuals with an official need to know. It is inappropriate to use PPI in group/bulk orders."

There is an ULTIMATE risk to all and any concepts of personal identity from the reactive global responses based on fear levels subsuming all rational thought about any freedom of movement for any citizen.

1. The ensuring no personal data ever leaves an individual's device. 2. Is NOT centralized on a server.

I realize that the (PEPP-PT) has good intentions. However, good intentions is NOT enough. Patent has already been granted to Facebook that is so encompassing, and transgresses every level of access and any belief in personal privacy as to be unbelievable. The patent that Facebook has been granted ALREADY transgresses every concept that (PEPP-PT) is publicly voicing as a possibility.

Based on the patent that Facebook has already been granted it is impossible for any human being to even imagine that any use of any device has any level of privacy. The data that has already been generated, and that Facebook already "USES" and "SELLS" and already POSSESSES on their and other SERVERS is already OWNED privately by one company, FACEBOOK. Nobody is getting their privacy returned to them on any level. Nobody's data that has already been and is generating new algorithms now accumulating sorted financial and personal data is getting their old data returned. Even if you close your account, your contacts, your data from your interactions for any purchase, from any purchase, even any letter, that I type into this comment box is being used by private associated data bases for whatever private monetized process. None of these monies are being taxed for any infrastructure of any community in any nation. These monies are only generating monies to a few individual families globally.

In the US postal offices, data was protected within closed systems. The US postal offices are not competitive business outlets. These offices are really data base privacy control centers. (Relatively speaking, and as much as humanly possible to allow delivery of goods to individuals.) Why does anyone even think that Congress does not improve and upgrade the computerized data systems of the USPS, the IRS and other systems of "INSTITUTIONS"? Making money for private groups has its real danger zones. The real consequence is that the institutions need to be recognized for the real systems that they are. The systems need to be updated, taken out of control of a few families that have been stealing every bit of data from citizens and return control of the differing nations to the rest of the citizens. This process of returning aspects of the "CONTROL FUNCTION" back to various system outlets through various monetization processes can not be done superficially. The control function of Federal, and State institutions can NOT be given to private corporate entities with absolutely no interest in any nation to corporate entities such as Facebook. Corporate entities with operational systems, with control systems based on theft is NOT the way to go anywhere on the planet Earth, or anywhere else in the Universe.

A danger zone is significantly different than an opportunity zone. An opportunity zone can NOT be based on theft.

I eel the topic of this article is resilience although the term was not explicitly used. However America now has many parallels to Russia being a kleptocracy Otto von Bismarck changes the modern world by providing national healthcare and national education freeThis made his empire an industrial powerAmerica relies on imported goods and imported brainsThey don’t want to invest in the average person so to speak But are gradients in intelligence really that important Can you leave aside 80 percent of the population and keep a democracyCan the printing press sustain America?What does Wall Street or facebook do that is actually physically useful?Without amazon I was able to buy stuff it’s just more retail and consumerismResiliency requires investing in people’s education and healthcare so people are adaptable and able to respond to various shocksThe money printing idea is that other countries will always bail us out by providing goods and brainsDestabilize other countries and their brains will run here not seeing the irony involved

Land of the freeFree choice means can choose to be ignorant To live in a false reality of entertainment and celebrities

Still the reserve currency is a really big advantage So maybe it will hold up and will go on with the same old same old

Someone somewhere really needs to review the above patent the has been granted to FB, if anyone has any awareness as to the implications, especially in need of serious focus by any and all of the writers and editors that are getting paid on this website of leading global economists, as to the real human-capital costs of the real global crisis. The real crisis has absolutely nothing to do with COVID-19. The above link needs serious examination globally as to the real effects to the real global economy to definitely be caught in a net that is beyond the worst depths of despair for all human beings on the planet and any progeny.

RE: "For Americans, that is not a very hopeful note to end on".

I imagine I should qualify my concern with the following: hopefully something other than AI algorithms of certain specific corporate monopolizers.

Individuals often act in different ways - the spectrum is very broad. Some will be converted from consumers to savers as they come to terms with new risks, while others will immediately spend forced savings at the first opportunity as they want to 'maximize their enjoyment' in case the next catastrophe takes their savings. It is a question of numbers.

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Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

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